Iron Condor

Whatever the job type, everyones ultimate goal is to succeed and gain surplus. You need to have the right knowledge in order to become successful. Being a business person, you should learn the most reliable and right way to become successful in trading market. Learning the trading commodities concept requires a trader to use different trading tricks, and by using law of charts. This can help in profiting from trading commodities.
In trading commodities, to gain bigger profits and earn large amount of money is to identify the market trends as quickly as you can before anyone else finds it. Currency trading can have many supports or resistance at the same time. If you are quick in determine the market trend then you can earn good profit. Trend is not limited to a specific time. Market trend can change at any time including intra-day, daily, weekly or even monthly.
Some trading commodities tools are available to help you identify these trends. Given below are some trading style for you :
1. Look out for trading up of prices. If you see a trading up in the trend it is advisable to buy at that time. In order to overcome the anticipative resistance, enter into the buy signals which are more than the current prices. On the other hand, if the trading down occurs, you should consider selling. Look for selling opportunities. To break the anticipative support, you must do exactly of that when trading up occurs i.e. to enter those sell signals which are well lower than the current prices.
2. You should look for optional objectives depending on whether it is short or long. You should consider short for anticipative support and long for next level resistance.
3. You should always have a protective stop on your trades till it hits.
Pay attention to some of the factors given below to make sure you know about the opportunities
4. The best time to look for buying opportunity is when the behavior of market changes from normal to bullish.
5. When the behavior is bullish you should hold protective stops for long positions which are below support level.
6. You should let go of the long positions if status changes to neutral.
7. Start finding short positions if the status changes to bearish from bullish. Bearish status is a good opportunity to find selling opportunities.
8. With bearish status you should hold resistance on short positions with protective stops.
9. Let go of short positions when status changes to neutral.
10. Find long positions if status changes from bearish to bullish.
You should have the knowledge about what to expect in future related to market trends. Have knowledge about directional bearish and proprietary bullish market forecast and resistance and support. Listen to different comments about the trends. Always remember that change in market which can be either bullish or bearish is very important in deciding which position to let go and which opportunity to grab.

The issue of direct access is an important one and it becomes more important the more short term your trading is. The market can change from a state of seeming paralysis to one of shocking volatility and activity in a flash. The length of time it takes between you deciding to enter an order and the order actually being in the market is obviously important.
When I first started trading I used a phone broker and was dismayed that my fills would often be so far from the price the market was trading when I first entered the order.
The first time I visited the trading floor, I discovered why. When I called in an order, first my discount broker would check my account equity, then he would call a phone booth on the floor, the phone broker on the floor would then write the order down and pass it on to a booth next to the appropriate pit, at that booth my order would be written down again and then signaled to a broker in the pit to be executed.
As you can imagine this would take quite a long time, even longer of course if the market was very active, as this would mean that the broker in the pit would be too occupied to take new orders. Compare this to my experience of trading as a pit trader. In the pit I was in the heart of the market and could observe every single order as it was executed (there was no delay in my price feed!).
To initiate a trade, whether it was to buy or sell at the market, or join the bid or the offer, all I had to do was open my mouth. You can start to see the huge advantage that trading on the floor gave me over off floor traders; and that doesn’t take into consideration the fact that my round trip costs fell by 96%.
Now the floor no longer exists, not in Europe at least, so why talk about the advantages of pit trading? Well the level playing field is now open to all, but very few take advantage of it. Trading with an electronic trading platform is exactly the same as trading in the pit, except I can sit down, it is much quieter and there are no crude jokes flying around.
I can trade with the click of a mouse; my order shoots to the exchange, enters in the market and appears back on my screen before I have time to blink. I think the advantages of direct access trading are clear and any futures trader still using a phone broker should move to direct access, they will also find their commissions are less (around $8 for private client traders).
The next question that arises is why trade futures? That is an important consideration given that there are a variety of alternatives vying for your trading capital (spread betting, CFDs and options), but in my opinion, futures are the only option (no pun intended) for successful short term trading.
A lot of traders are trading the stock indexes like the FTSE, the DAX, the S&Ps, NASDAQ and the DOW, but rather than use futures they are using spread betting firms. The reasons for using these firms is that they require very small amounts of capital to get started, a trader can trade very small amounts (like $1 a point on FTSE as opposed to $10 for FTSE futures) and these firms make opening an account so easy.
I understand the lure of being able to open an account with very little money and trading small amounts, but I have some serious considerations about using spread betting as a realistic vehicle for professional trading.
The two biggest selling points are no commissions and no capital gains tax. There are many different costs to trading, commissions are one and the spread is another (especially when you have to trade at the market as you do with spread betting, with futures you have the choice of joining the bid or the offer).
Commissions are important for an active trader and as an active trader you can get them very low, but lets assume they are $8 per round turn for futures and lets assume that the spread in FTSE futures is an average of 2 points. If the spread with a spread betting firm for FTSE is 6 points and assume that we are trading $10 a point we can compare the two trading vehicles.
Last week I made an average of 2.42 points per contract traded and I traded 48 times. That is, for each contract I bought and sold I made $24.20 before commissions, assuming my commission rate is $8, I made a profit of $16.20 per contract traded, which is $777.60 net profit if my average size per trade is one contract.
Had I had the same success trading with a spread-betting firm, with a 6-point spread, I would have lost $1718.40! Now I would rather pay tax on a profit that no tax on a loss.
There is one other very important reason for trading the futures market rather than a non-exchange traded market such as those offered by spread betting firms. The futures markets are exchange traded and this means that they are fully transparent, i.e. everything is visible and above the table, I can see every single trade that happens. Imagine the trading pit, as it used to be when traders stood physically in a ring trading with each other.
When a trade is entered, the order goes into the pit and is represented there, free to be taken by any other market participant. We can all see what is happening, we trade with the same information and with the same advantages/disadvantages.
Now assume you are a trader who can only trade with one broker in the pit, you can trade as much as you like, any size you like, but he sets the spread he is willing to offer you and you have to trade at market (i.e. buy at his offer and sell at his bid). This broker doesn’t want to loose money, naturally, so he always makes his spread wider than the real market spread, he also, naturally, puts his interests before yours, so he won’t always be willing to trade when the market is moving fast and he is uncertain.
Remember whenever you make money he loses, so he is very careful to maintain his advantage at all times. Who wouldn’t want to be in this brokers position (he isn’t really a broker, though he claims to be)? When you trade with a real futures broker, all the broker does is facilitate your trade; he gives you the ability to have you orders represented in the pit. A real brokers concern is that they execute your order as efficiently as possible, that is their job, they do not take positions and they do not take the opposite side to you.
They naturally want you to make money because by making money you become a client who will continue to pay them commissions. Trading with a spread betting firm is absurdly costly, spread betting firms are like amusement arcades, they can be fun, but to imagine you are going to make your living from slot machines is illusory.

The amount of stock options being traded in America is exploding! This is great news because there is far greater liquidity in the options market and many more money making opportunities for individual traders just like you. During the next ten weeks I will be writing articles on how you can profit from one of the fastest growing areas of financial investment available to individuals.

In case you don’t know what a stock option is let me explain. Simply, a stock option gives you the right to control the ownership of a stock for a fraction of the price to buy it. There are two types of options; the first is a Call Option which is the option to buy a share of a certain company for a predetermined price before a predetermined date. The second is a Put Option, which is the option to sell a share of a certain company for a predetermined price before a predetermined date.

For example if you purchased 100 shares in ABC Company that traded at $50 each, you would have to invest $5000 to buy those shares. However you could buy 100 Call Options priced at $5 each, with the right to buy ABC Company at $50 any time up to a date in the future (say November 16th) and you would control the same amount of shares for only $500. If the price of ABC Company goes up by $5 and you owned the shares you would have made $500 or 10% on your $5000 investment, however because the Call Options give you the right to buy the shares at $50 and they are now worth $55 the price of the options would go up $5 as well and you would have made $500 or 100% on your $500 investment. This example demonstrates the great leverage stock options provide.

Call Options are used when you expect the price of a stock to rise, if you expect the price of a stock to fall you can buy Put Options, which as mentioned before, give you the right to sell a stock at a predetermined price. So in the example above if the price of ABC shares fell to $45 and we had bought Put Options giving us the right to sell ABC at $50, the Put Options would be worth money because you could buy ABC shares in the market for a cheaper price than you could sell them for. Wonderful isn’t it, you can make money if the stock market is rising or falling!

To summarize a stock option has four components to it:

1. The underlying stock

The stock that the option is traded on (ABC Company in the example above).

2. The exercise date

The predetermined date, before which, you can use or exercise your option. Options always expire on the third Friday of each month (November 16th in the example above).

3. The strike price

The predetermined price you can buy the stock for ($50 in the example above). 4. The type of option

Either a Call or a Put option.

Here is the first key to successful stock options investing. It is very simple: practice, practice, practice. I cannot stress enough how important practice will be to your success as a stock options trader. Trading options is an inherently risky endeavor, however by learning the keys to successful stock options trading it is possible to mitigate this risk and maximize your gains. Options are a zero sum game, which means for every winner there has to be a loser. I’m sure you want to be a winner and not a loser, right? So you must take the time to learn the fundamental theories of options trading and practice the strategies behind options trading before you risk any of your hard earned capital in the market. It is only when you are winning seven out of ten trades on paper and you are confident in your trading plan and money management techniques that you should trade in the market for real. By the time you have finished reading these articles you will have a plan and know just what those money management techniques are. Look out for Key #2 coming soon.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

You may think you know what a CFD, a currency pair, or an option is, but you probably don’t know anywhere near as much as you should. For example, trading a CFD and an option using the same outlay can result in two completely different scenarios; the CFD can take out your initial outlay, plus more sometimes resulting in a margin call (if you know what one of these are). Bad traders can have their entire capital wiped in very short time if they’re not careful.
An option on the other hand can only ever go to zero; in other words, you can only lose your initial outlay, but with options there is a thing called time decay, which simply means, the longer you hold an option, (all else being equal), the less valuable your option becomes. CFD’s don’t have time decay, but they do incur interest when bought for every 24 hours you hold the position open.
Options also have various components that go into making up their price, including time (already mentioned), and intrinsic value, not to mention a few others. A lot of newbie options traders are bewildered when they see the underlying asset go up in price yet their call option does nothing. For some reason it escapes these people that it may be a good idea to learn what an option is.
So if you decide you think the little green bar is going to keep going up, what do you buy an option, CFD or just the stock? Then there are market makers and brokers, regulators, and laws which differ greatly between just these two derivatives markets. You can’t trade CFD’s in the US, so what happens if you get sold on a real great trading system promising huge returns only to find out that the owner of the system lives in the UK and trades his system with CFD’s?
Then you have Forex, the market where people think they can start with a measly $10! Unlike all other markets, Forex has two opposing forces at play. By buying the EUR/USD, you are in fact buying the Euro currency with US Dollars, and if you live outside the US, then you’ve got to factor in the currency exchange rate between the US dollar and your own currency, otherwise you have no idea what you’re risking.
Another example; if I live in New Zealand and I decide to go short the CAD/JPY pair, how do I work out my risk for the trade? Well for starters, going short the CAD/JPY means I am buying Japanese Yen, with Canadian Dollars. How many of these Canadian Dollars am I willing to risk so I only risk ‘X’ amount New Zealand Dollars?
This is not to mention that fact that CFD and Forex markets are unregulated. If you think you’re getting the same price at any given time as someone else on the other side of the world, think again, because you aren’t!
Futures and Commodities; Ah, the big juicy bull market that no one seemed to care about when our little friend with the bow tie was singing from the rooftops to an empty street. Of course now that our favourite money channels can’t stop talking about them everyone else seems interested. Have you ever seen the little pop up ad claiming an 80% success rate trading Oil? Well that’s all good and dandy but unless you have the capital to trade Oil, it’s absolutely hopeless to you. The standard method of trading one Oil contract requires you have about a $4000 margin. Check out the margin requirements to trade all the other commodities in the news lately, Wheat, Corn, Sugar, and Gold.
Rest assured, now that we have a bull market in commodities, the ways in which one can trade these markets will explode allowing smaller margins and more retail traders to experiment (yes that’s what the majority will be doing even if they don’t know it). However, these instruments all have their own characteristics that you need to learn.
Every market is different, it has different characteristics, different laws and regulations (if at all), they act differently, and they have different driving forces fundamentally. Pick one or two markets to learn and get comfortable with them, but for goodness sake, pick the markets that will suit you and your goals and allow you to trade with the limited resources you have available.

The stock market appeals to people for many reasons. Some see it as a quick way to make a nice nest egg to tuck away for their eventual retirement. Some see it as a way to live out their fantasies of being a powerful, corporate type. And some are actually more logical about it, seeing the stock market as a potential way to make money, if they play their cards right. They know that there are no sure things in life and nowhere is that more clear than in the stock market. But options trading is a opportunity for the small investor too.Options trading has grown in popularity, especially with the smaller investors over the course of the past ten years. Unlike other forms of trading that can require large amounts of venture capital, options trading can be accomplished with often a very small initial outlay. Of course, because they can be easily started, it can allow the uninitiated or poorly informed to get in well over their heads in a matter of a very short time. Not allowing yourself to understand the market before you make the first trade is financially foolhardy and personally dangerous. First of all, as the name implies, option trading is not buying actual stocks, but rather busying the right to own or sell them. The options trader can make the same profit with stock options that he would make as if the owned the outright stocks, but that also means that he would face the same risks if that stock did not do well on the market. As with other forms of trading, options trading will require that you learn some facts and make some decisions before hand. Know everything you possibly can about options trading, as well as trading in general. Know how to track stocks for movement and know how to watch for trends. Know what the basic types of options trading is- and understand how each works. And, as with any other type of trading, make sure you know and adhere to your personal limits, including your absolute loss cap. Do not overextend yourself, even if you just got a tip on a great stock. Options trading can focus on stocks that are heading in one of two directions, up or down. Call options will focus on rising stocks, while Put options focus on those on the decline. Both allow you the right to buy the option on a stock at a fixed price, but do not force you to do so. Knowing how to work this system to your best advantage is key.Invest in yourself, learn the basics and expand on that to become profitable in options trading.  

With the world in recovery mode, many people are still questioning how the financial markets got so out of control. They are also questioning something a little closer to home; how to better look after their own money and finances.If we are being honest with ourselves, we would probably admit that we can improve on at least one of the following; long term investments, tax efficiency, actively reviewing our existing investments and looking at new opportunities that the markets in 2009-2010 have provided / will provide.Also, I don’t think that there are many of us who wouldn’t benefit from putting more thought and effort into these key areas. Having said that, there are a growing number of individuals who are making use of a newer, and highly regulated, form of trading.One type of trading, namely financial spread betting, has a range of attractive features and is an option worth considering as part of your portfolio.When speculating though you must always remind yourself that the markets can go down as well as up. With spread betting you can lose more than your original stake or investment.But why trade if there is a risk?Whether you have an existing investment plan or not, it always worth considering any avenue that offers quick, simple access to the markets and a range of tax-free* advantages. Spread betting is one such avenue.Of the many other advantages, spread betting profits do not incur capital gains tax*. You are not actually buying and selling any assets or stock or shares. You are simply speculating on the future price or value of a financial market.A boon for many spread bettors is the sheer convenience of trading over the phone and online, even after the main stock markets and futures exchanges have closed.Another plus point is that there may be occasions when an investor wishes to close a spread bet early. This can work in two ways. It can help you limit a losing position or it can also help you lock in profits on a winning trade.The Financial Services Authority regulates the spread betting companies. This helps to ensure a certain level of quality or, more importantly, financial protection. With regulated companies like paddypowertrader you can trade some markets 24 hours a day, including key Forex and Stock Market Index markets. Naturally, you can also trade Crude Oil, Gold, UK and US shares and so on.So whilst there are a good number of positives, it is important to understand the negatives.Spread bets do carry a high level of risk so you should only speculate with money you can afford to lose. Before you trade, please ensure that spread betting matches your investment objectives, make sure you familiarise yourself with the risks involved and seek independent advice where necessary.* Based on current UK Tax law. If you pay tax in a jurisdiction other than the UK then this may be different.

For those who have not yet discovered the benefits of rolling out options, it’s high time you look closely at this very valuable feature. Roll outs not only offer additional profit generating advantages but more importantly it offers an extraordinary ability for limiting or eliminating potential losing positions. Before going on to describe the remarkable benefits of using the rollout process let’s be sure we understand what is meant by rolling out an option. It is simply the closing of one option position and the opening of another position either farther away in strike price or farther away in expiration date, or both, with the objective of making an existing condition more beneficial to you.

There are many situations where option rollouts may be used. For purposes of this article, being limited in scope, I will just touch on two of the more practical uses of the rollout process. The first is the benefits it gives the covered call player. The second is the remarkable ability of the rollout feature to offer protection against the potential for loss that faces the naked option writer.

How does a roll out benefit the covered call player? Consider this scenario: you own 500 shares in a company which you originally bought some time back at a price of $50. Assuming the market has recently gone on an uptrend and your stock has now appreciated to $60. You are tempted to sell and take in profits from your investment. At the same time you don’t want to miss out on any further upward movement the stock may take in the face of what appears to be a strengthening market. Yet you are also afraid that the market might reverse direction and you could then lose some of the profits you’ve already achieved. Selling call options against your stock enables you to participate in any future appreciation of your stock, and the profits generated from the option sale provides some protection if the market should change direction forcing you to exit your position. If the stock continues rising and hits the strike price at which you sold the calls, you are faced with two nice choices. Let the option holder call the option (exercise his right to buy the stock at the strike price you sold it for) or, roll out the options to a farther expiration and strike price once again allowing you to participate in further gains if the stock continues its upward trend. If you let your options be called you have gained not only the money from the option sale but also from the appreciation price of the stock at the time the option is called. But if you roll out the calls you could continue to stay in the game for a further appreciation in the value of your stocks. Of course there is always the potential of a market reversal and losing the potential for further appreciation. Even so you still have gained the premium money you obtained in the sale of the calls. If the market continues uptrending you can ride the appreciation wave by rolling out your positions several times up to and until you run out of future strike prices. By this time you would have gained substantial profits.

Now let’s see how the roll out benefits the naked option writer. When you sell a naked option, be it call or put, you theoretically face the risk of unlimited losses in your position due to the fact that if the underlying security moves against you the potential for loss is unlimited. The term “theoretical risk” is used here because this risk has been blown out of proportion and grossly exaggerated. While the potential risk of loss does exist it’s a negligible one if you employ appropriate strategies to defeat it. Please see another article on this subject entitled “Risk of ‘Unlimited Loses’ In Naked Option Selling Is A Myth” where it talks about this theoretical risk being totally controllable using proper defensive strategies. One of the defensive strategies mentioned in that article is the use of roll outs.

Here’s a scenario that may face an option writer. Let us suppose you sold naked puts several strikes out-of-the-money with expiration forty to sixty days away. Some time during its life the market turns against you and begins to drop down to the price level of the strike you sold. Many option traders would just close out the position buying back the puts at a higher price and taking a loss. You being the smart trader would roll out your puts by buying them back at the now higher price and at the same time sell new puts farther out in time and several strikes out-of-the-money at a higher price than you bought back your puts. You’ve just converted your original 40 or 60 day puts into longer expiration puts thereby avoiding taking a loss at this point in time. The process of closing and opening positions can be done as a spread trade and in this way you are paying reduced brokers commissions. If the market continues its downward trend you can also keep rolling out your positions repeatedly till you reach a point where there are no more available future options to roll out to. At this point your puts may be so far out in the future that even if it goes deep in the money chances of it being exercised are slim. There is an e-book written on this subject titled “Stock Options: The Greatest Wealth Building Tool Ever Invented” where the roll out process is described in much detail together with other protective strategies for naked option traders. The e-book contains numerous actual trading illustrations of the use of the roll out process. See this article’s author profile for more information.

If you are going to be an option trader or already are one, rolling out is a must strategy in many of your option trades. You will find the strategy highly rewarding and in many cases offers a wide variety of choices to your trading styles. Not only does it enable you to increase your trading profitability but more importantly it affords you the ability to protect your trade positions against certain adverse conditions. As this article is written today, we are in the midst of a financial crises as never seen in a long time. The stock market has now depreciated to panic lows with investors seeing the value of their investments evaporate into thin air. Yet for many option traders extensively using the roll out process they will weather the storm much better than others and they will certainly recover much faster when economic conditions turn for the better.

Wouldn’t it be great if we could buy an option with five months left until expiration and sell an option with 2 months left until expiration for the same price? You couldn’t lose. Well we can’t. I love options spreads so much I realized something very important. We can buy a spread that has a lot of time value left at almost the same price as we can sell one with less time value left. The reason really opened my eyes and gave me new insight into options. Here is what I came to realize.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on th e price per day which options were more expensive.
The first 1 or 2 option months, as everyon e knows loses time value quickly. The at the money strike prices are very expensive compared to the out of the mon ey strike prices. Since there is not that much time left, how much can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money option (43 points) is only less than 4X the price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the cost of the 6 day out of the money option (2 points) but only has 10X the time value. We will buy the cheaper options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6 day out of the money and buy 70 day at the money. This will be done for a 4 point debit. We are now buying a spread that has 10X more time value than the one we are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month to take in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this befo re in reference to the laws of Gravity. We have laws in the commodity markets as well. What comes down, must go up! The greatest traders of our time like War ren Buffet know this. He is perhaps the greatest Stock trader ever. He had never traded commodities until a few years ago. He bought silver in the futures market. When the market went even lower he bought more. The “smart money”, commercials will not be scared into selling when a market they have purchased drops even further. They know better than anyone that a commodity has real value and will always be worth something.
There is a famous book, “You Can’t Lose Trading Commodities”. The author buys commodities and then just waits for the market to go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won’t go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn’t need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won’t lose 50 times in a row because the market can’t go b elow zero.
Now before I go an y further, I need to tell you that I am not recommending you double down on your trades. What you can find are mark ets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never b e sure how much a market can go higher. First we need to find a market that is low already so we won’t have to wait that long and also so there will be less capital needed. I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.

If you are a long premium options trader, volatility is a necessary element to be successful.  If volatility is lacking, time decay (Theta) will make this financial instrument a challenging (or even more challenging) one.  These days, volatility is not lacking.  In fact, volatility is thriving.  For a long premium options trader, there is nothing like having market tailwinds to benefit your options strategy.With a market that has gained 20% since March 9th bottoms and is down over 3% intra-day today (as of time of publish), 2009 has obviously been an extremely volatile year thus far.  This year seems to be even more volatile than 2008, which by our calculations, was the highest level of consistent daily volatility in decades.  In 2009, there have been a multitude of sessions that have seen stocks rally or fall by a significant percentage.  It seems almost commonplace that the Dow Jones Industrial Average is up or down at least one percent.

Volatility can be defined in many ways (i.e. implied volatility, statistical volatility, etc.) – in this analysis we look at volatility by the number of occurrences the Dow Jones Industrial Average rallied or declined by one percent or more on a closing basis in a trading day.  More specifically, we looked at the absolute return for the Dow Jones Industrial Average for each day going back to 1928. We then calculated the number of occurrences (and the percentage) that the Dow Jones Industrial Average finished up or down more than one percent in a given year.   

Below is a graph of the percentage of days out of each year that saw a market move of one percent or more.  Two items that stand out are (1) the increase in volatility has soared since 2006 (from 10% to 64%) and (2) the current level of volatility only rivals the early 1930’s when volatility peaked at 74%.

When adjusting the delta on an option spread to manage risk, many option traders do not understand how to use volatility to adjust a position in their favor.

For example, let’s say you are in a butterfly spread and the market trends up and hits your adjustment point. So what kind of adjustment do you make?

Well, when trading options, it’s important to follow the volatility chart as well as the price chart. For example, if the underlying is trending up, it’s most likely that the vols are going down (but not always the case). So, when putting on your adjustment, why not put on an adjustment that benefits from falling volatility? (eg. a negative Vega adjustment).

Likewise, if the vols are rising, you might consider putting on a “positive vega” adjustment.

In conclusion, there are many ways to neutralize the Delta position of your options spread. So when comparing your adjustment possibilities, remember to analyze the volatility graph to choose the best Vega adjustment at the same time. Videos on this topic and others can be seen free on my website. www.sjoptions.com